Reference no: EM132566146

Question - Ultra Conservative is a finance company with total assets of $50 million, most of which is made up of small business loans of $46 million. The following selected data relates to Ultra Conservative's first three years of operation:

Ultra Conservative commenced operations on 1 November 2017and by 31 December 2017 had established loans worth $40 million and incurred no bad debts. However, the board of directors wanted to be conservative and decided on establishing an allowance amount of 1% of business loans outstanding at each balance date, (hence the figure of $400,000 at 31 December 2017). All business loans regarded as uncollectible were written off against the allowance for doubtful debts account. In the time since Ultra Conservative commenced operations there have been no cases where a business loan previously written off has had to be reinstated.

Required -

a) Prepare the journal entries to write off the bad debts in 2018 and 2019.

b) Calculate the net value of Accounts Receivable - Business Loans, at 31 December 2018 and 2019.

c) Evaluate the director's policy of providing for doubtful debts at 1% of Accounts Receivable - Business Loans outstanding at balance date.

Discuss why a business might decide to set up a provision for warranty account. Provide an example to illustrate the operation of such an account.